ET in the classroom: Class Action Suit

The first time class action suits were in the spotlight in India was when the Satyam scam broke out in 2009. That was the time when many small investors in India were could only watch helplessly while overseas investors filed class action suit claiming damages. But the accounting dodge forced India's policy makers to introduce provisions for a class action suit in the new Companies Bill which is yet to be notified. ET explains the concept of class action suit, the way it originated, and how it will benefit investors.

What is a class action suit?

The concept of a class action suit originated in the United States. It offers a platform to investors facing common legal challenges to join hands and participate in a lawsuit. It is a cost-effective way to seek legal redress as otherwise it would be expensive for an individual shareholder to launch a lawsuit and seek compensation.

Are class action suits common in India?

In India there was no concept of class action suit until the Satyam accounting scandal broke out in 2009. At that time, capital market regulatorSebi introduced a provision to enable funding of investor associations to undertake legal proceedings in the interest of investors in listed companies and also in firms which were close to getting listed. However, a concrete step was taken in the new Companies Bill which has a clear provision for a class action suit. The bill has not been notified yet.

How does Sebi's arrangement for class action suits work?

Investor associations approved by Sebi can avail of the financial assistance provided they prove that at least 1,000 shareholders have been impacted by fraudulent trade practices. Sebi finances the lawsuit from its investor protection and education fund. However, no two investor associations can apply for aid on a common legal issue.

What does the new Companies Bill specify about class action suits?

The bill suggests that a minimum of 100 shareholders can get together and file a class action suit. But if the application is found frivolous, then those filing the suit will have to pay Rs 1 lakh to the entity against which it had filed the suit.